Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Francés' second quarter 2018 results conference call. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during both companies' presentations. After the companies' remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star then zero to reach the operator. First of all, let me stress that some of the statements made during this conference call may be forward-looking statements within the meaning of the safe harbor provisions found in Section 27A of the Securities Act of 1933 under U.S. Federal Securities law.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information concerning these factors is contained in BBVA Francés' annual report on Form 20-F for the fiscal year 2017, filed with the U.S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO, Mr. Diego Cesarini, Finance and Investor Relations Manager, and Mrs. Cecilia Acuña, Head of Investor Relations. Mrs. Acuña, you may begin your conference.
Thank you. Good morning, everyone. As usual, I will start with a brief summary on the most important topic of the second quarter of 2018, then we'll be open to questions. Now, I'd like to make a brief review on the macroeconomic environment. The country suffered a contraction beginning in the second quarter of 2018 as a result of the drought occurred during the first month of the year, the sudden depreciation of the peso that resulted in higher interest rates and higher inflation than expected. Such increasing rates, a higher financial uncertainty, and the increase in cash reserve requirements implemented by the Central Bank, 1,100 basis points, have contributed to a slowdown in the pace of growth of the financial intermediation activity with the private sector in real terms.
It should be noted that in this environment, banking deposits maintain a good performance, although slowing down the pace of growth, that the financial system continue with solid levels of liquidity and solvency. I'd like to make a brief review on the bank's performance. First of all, I like to remind you that since January the 1st, 2018, figures are reported in accordance with IFRS. Having said this, in the second quarter of 2018, BBVA Francés reached a net income of ARS 2.1 billion, 37.4%, and 112.9% higher than the net income registered in the previous quarter and in the second quarter of 2017. In the last case, we state this for comparative purposes. During the second quarter of 2018, the ROE reached 26.4%, and the ROA 3.5%, compared to 2.9% and 20.3% published in the previous quarter, respectively.
Net operating income reached ARS 8.2 billion, increasing 16.1% compared to the previous quarter, driven by higher net interest income, fees, and foreign exchange results, both in trading and portfolio activity. Operating expenses reached ARS 5.2 billion, an increase of 8.7% compared to the previous quarter, consequence of higher administrative expenses, which grew as a result of the rise of transportation of cash, 45.3%, mainly during the first month of the consequence of the exchange volatility. Personal expenses decreased by 1.4% during the same period. The efficiency ratio in the quarter reached 49.4%, showing an improvement of around 700 basis points compared to the previous quarter. In connection to the activity level, at the end of June 2018, the private sector loan portfolio totaled ARS 152.1 billion, increasing 16.3% during the quarter and 82.6% in the last 12 months.
Loan consolidated market share was 8.24%, showing an increase of 68 basis points in the last 12 months. Credit growth was affected during the second quarter by the devaluation of the peso and higher interest rates, resulting in a strong increase of loans in USD, 40.2%, mainly due to the reflection of the new value of the currency, and a mild growth in ARS of 8.5%. With regard to loans to individuals, credit card loans recorded a positive performance, offsetting the slow rise in the demand for mortgages and personal loans. Commercial loans tended to moderate growth and were focused on short-term terms, although, as a result of the temporary closure of capital markets, it was possible to see more interest from certain companies, especially larger financial companies, over longer terms. As of June 30th, 2018, the asset quality ratio was 0.86% with recovery ratio of 273%.
The cost of risk reached 1.49%, 17 basis points above the last quarter due to some deterioration, mainly on the retail portfolio. The drought that affected the country during the first months of the year did not have a significant impact on the affected portfolio. Total deposits reached ARS 192.9 billion at the end of June, increasing 20.6% compared to the previous quarter and 53.6% compared with the second quarter of 2017. Foreign currency deposits remained stable during the quarter. The balance reflects the depreciation of the peso. Local currency deposits increased 8.3%, mainly due to increases in saving accounts and current accounts with interest. BBVA Francés continues to show an adequate level of solvency. At the end of June, the total capital ratio was 14.6%, and the Tier 1 ratio was 13.4%. Thank you very much. We are now ready to answer your questions.
Thank you. The floor is now open for questions. If you have a question, please press star then one on your touch-tone phone at this or any time. If at any point your question is answered, you may remove yourself from the queue by pressing star then two. Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Our first question will come from Gabriel Nóbrega with Citibank. Please go ahead.
Hi, everyone. Thank you for the opportunity. I have a question regarding your assets and then liability side. I just want to understand how fast are you able to reprice your assets and your liabilities as well? Moreover, with the current increase in the reserve rate requirements to 11%, and out of those, 6% that cannot be remunerated, how should we look at your margin going forward? I'll make a second question after. Thank you.
Hi, Gabriel. This is Diego Cesarini. Thank you for the question. I will split the balance sheet in two. First, in the dollar balance sheet, which represents approximately 25%-30% of our total loans. We do not pay interest on the deposit side, so loans reprice approximately one-fifth or one-sixth of our portfolio every month. It's a very short duration portfolio, so we reprice it very quick. I guess that you are worried about our peso book. Regarding our peso book, our time deposit base, which is the one that reprices, and our remunerated current accounts represent approximately 45% of our total book. We hold approximately the same amount of money in short-term loans and Leliq or Lebacs. The speed of repricing is similar on assets and on liabilities.
What we have seen in the past three months is that the increase in loan rates have been, in general terms, more aggressive than on deposits. Just as an example, our deposit base, our time deposit base, has gone from a 21% rate to a 30%-31% right now. Our overdraft portfolio, our discount of documents or our Leliq or these kind of lines that are very short-term, they have gone from levels of 26%-28% to levels of 42% in case of documents, or 50%-51% in case of overdrafts. The same happened, of course, with the Lebacs positions that have gone from 27% interest rate to 44%, approximately. Looking at the future, of course, these reserve requirement increases that the Central Bank has been regulating during the last couple of months have an impact.
We are trying to keep some deposit costs as in our remunerated accounts, as low as possible, but it depends, of course, on the market. Without that, we have some impact on these increases of reserve requirements. Regarding our NIM, probably our NIM had an impact on interest rate swaps in the second quarter. Probably that will not be present in the third quarter. My guess is that NIMs should be stable even with increase in reserve requirements, or they may fall a little, but there will not be much damage comparing with the previous quarter.
All right. That's very clear. As for my second question, it's regarding your asset quality. What are you beginning to see in terms of trends? We saw that during the quarter, your NPL ratio actually deteriorated 40%. I see that it's still the lowest NPL ratio among the other Argentine banks. If you could give us more colors on what you're seeing in terms of trends, and as well, if I could ask on your coverage ratio, we thought that it continued to be well above 200%. Do you maybe have a comfortable level? Do you expect maybe your coverage ratio to decrease over the coming quarters? Thank you.
Okay. I will start by the second one. The coverage ratio has gone up from 250 approximately to 223, I guess. That is mainly because our NPL portfolio has grown. We went from 71 basis points to 87, and the coverage ratio going down, just a logical consequence of that calculation. Probably, it can go down a little more. I cannot tell you exactly where I think it will be by the end of the year, but probably the trend will keep. Regarding asset quality in general terms, well, I would begin by saying that we are comfortable with our asset quality. We have always highlighted the good performance of our portfolio in the past, and I think that at this moment, even if you can see some deterioration, we keep being comfortable.
When we look at our provisions, by the end of this second quarter, we are still under our budget. We were expecting, at the beginning of the year, some deterioration on this portfolio. Probably in the second semester, this process will continue, and we could figure out that we will end maybe 10% above our estimates at the beginning of the year. Our cost of risk that right now stands at 1.49, I guess, we think that that could end around 1.60. It's not such a bad situation comparing with the environment.
All right. That's very clear, Diego. Thank you for the answers.
You're welcome.
Our next question comes from Frederic de Mariz with UBS. Please go ahead.
Thank you. Good morning, everyone. Diego, Cecilia, thanks for the opportunity. A couple of questions. The first one is a follow-up on the previous question on asset quality. When you think of that increase from 149% in cost of risk to 1.6%, let's say, for the end of this year, it's really just a small increase, but where do you feel that the pressure on asset quality could come from? Are you mostly focused on consumers because of inflation, or is it mostly because of some corporates? Also in that team of corporates, any sector that concerns you, maybe construction, maybe something else? That would be for asset quality. My second question has to deal with efficiency.
You've had one of the most successful and aggressive digital strategies. Just wanted to get an update on where you stand in the strategy. Also what it means in terms of potential efficiency gains.
Well, thank you, Frederic. What we are seeing is some deterioration mainly on the retail side of the portfolio. This is basically credit cards. Of course, our trend, maybe the slope of our deterioration is clearly below the average of the market. Even after May, after the month of May, where some salary increases were seen across the industries, we saw some deceleration of this process. Even though, we think that the most burden will come from this retail portfolio in the coming quarters. Regarding small companies, we have seen a few cases with problems, but in general terms, nothing serious. We were worried at the beginning of the last quarter because of the severe drought that Argentina has suffered. During July, when we recovered most of our agro loans, things were normal.
We got our agro credit cards repaid without any kind of problems. Still, we are not seeing nothing serious across the small companies scope. Regarding efficiency, well, we have closed a good quarter with slightly below 50%. We were forecasting for the whole year, an average in the low 50s%. I think that we are already on track on that, and we will probably get those ratios. The bank has been very prudent on costs during the last quarters. We have a strategy of not growing in branches. We have kept the same level of around 250 for the last years, and I think that situation will continue. Our digital strategy is working well. Every quarter, we see more people, more customers working on our web, on our cell phone application.
More products are sold online instead of people going to the branches, which are now being more focused on adding value to customers. A lot of operations that were performed through physical human cashiers have been withdrawn, and now people are directed to the automatic tellers or whatever. I think that we will keep on that line. A very small portion of our costs are related to effects, so we didn't suffer the evaluation of the currency. What we saw during the last quarter was an increase in the cost of transportation of banknotes to the branches. That was mainly because of the effects of volatility and people demanding more bills, more USD. That has already subsided in the following months.
I think that things are going well in terms of efficiency for the bank, and we have the intention to keep lowering that ratio next year, of course.
That's great. Thank you, Diego.
Our next question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Thank you. Good morning, everyone. My question is regarding loan growth. My question is, for how long do you see that credit demand can be sustained in Argentina under this interest rate environment? Where could demand continue to come from in that same scenario? When do you expect, of course, it's a difficult question, but when would you expect a more normalized situation in terms of interest rates to help further improvement in credit growth? Regarding also the loan growth outlook, my question is, do you see the construction sector as an opportunity given the PPP project in Argentina, or do you have a cautious stance given all the noise that is going on in the sector right now? Thank you.
Thank you, Alonso. I start with the last one, and I hope I will remember the first one. Regarding loan construction sector, we have very little exposure to that sector. Approximately it's 1.5% of our total portfolio. My first take here is we have not been very aggressive in the past. I think that this is not the best moment to start being more aggressive on that. Regarding credit, we have seen some slowdown, of course, in the second quarter, and that trend keeps and probably accelerated in the third quarter. The first reason, of course, is the rise in rates. As I mentioned before, most credit lines have increased their rates by 15 or 20 percentage points. Of course, that brings less demand from our customers. The general environment, economical, political, financial, of course, helps also for having less demand.
The third thing is that, well, Central Bank probably wants banks not to lend as much as they were lending, because if not, we wouldn't have suffered 11 points of increase in reserves. I would say that right now, if most Argentinian banks, even if they wanted to and they had loan demand, they will feel some constraints on these reserves issues. What I foresee is that with this new strategy by Central Bank of decreasing the stock of Lebacs sooner than we were all expecting, a strategy that personally we think it's good, they will have more possibilities of decreasing rates in the coming months. Not probably in the coming one, two, or three months, but they will be more free to move rates down sooner than expected. Probably, this means that inflation and the effects volatility should have been contained by that moment.
If not, probably we can expect rates to be kept at this level for some more months. We still expect the bank to grow between 45% and 50% this year. Of course, a good part of this growth comes from the evaluation of the currency. We are expecting peso loans to grow around 25% this year, and the rest, of course, comes from the USD activity and the depreciation of the currency. For next year, we are forecasting a growth of around 35%.
35% next year?
Yes.
Perfect. Well, thank you very much for your answer.
You're welcome.
If you would like to ask a question, please press star then one. Our next question comes from Carlos Gomez-Lopez with HSBC. Please go ahead.
Thank you very much. Two questions, Diego. First one, you said you expect 35% loan growth next year. What do you expect inflation to be next year and in the coming years? What is the path of inflation in your projection? We understand it's difficult to project right now. Second, any news on the Christmas sale? Thank you.
Well, regarding inflation, Carlos, we are expecting for next year a level of 22%. Growth will be approximately 13 points in real terms. Similar to the growth we will have in this year. We are expecting a 33% for 2018. No, we don't have any news about Christmas sales. Really, I can't give you any color on that.
It was supposed to happen this year, right?
Yes. I guess it was supposed to be this year.
Okay. Thank you very much.
Welcome.
At this time, I'm showing no further questions. I would like to turn the floor back to Mrs. Acuña for any closing remarks.
Thanks again for joining us. If you have any further questions, please contact us in our offices.
Thank you. This concludes today's presentation. You may disconnect your line at this time, have a nice day.